Quess Corp Limited IPO Views - 27th Jun 2016

Quess Corp Ltd (QCL), promoted by Thomas Cook (~63% holding post dilution),
provides comprehensive solutions including recruitment, temporary staffing,
technology staffing and IT product and solution, skill development, payroll,
compliance management, integrated facility management and industrial asset
management services. The company derives 86% of its revenues from India while
the balance comes from its international business. Over the past three years, the
company has made several acquisitions which has fueled its growth and has
shown good track record of improving the performance of its acquisitions.
Huge growth opportunities across business verticals: QCL has presence in
high-growth business verticals like temporary general staffing, payroll &
compliance outsourcing, professional IT staffing, facilities management, etc.
under different brands. As per a report by Frost & Sullivan, the market for these
segments in India is expected to grow at a CAGR of 19-24% over 2014-19.
Further, the penetration level of temporary staffing is low in India (0.1%, which is
among the lowest in the world), and is likely to improve from hereon on account
of increasing need for cost efficient structures. Thus, we expect QCL to benefit
from increasing demand for manpower across industries on the back of its strong
Management, healthy track record and presence in diversified business verticals
which would help it to enhance its market share and increase revenue.
Focus on improving operating margins: Going forward, we expect the company’s
overall operating margin to improve on back of (a) change in revenue mix in
favor of higher margin businesses (currently the People and Services business
contributes ~55% of the company’s overall top-line which is a low margin segment)
(b) two of its acquisitions Brainhunter and MFX showing improvement in performance with
the latter having turned profitable recently, which should result in increase in margins
(c) improvement in ‘core to associate employees handled’ ratio from ~200 to 250.
Outlook & Valuation: Over the last four years, the company has reported strong
revenue CAGR of ~52% and PAT CAGR of ~94% which was largely fuelled by its
strategic business acquisitions and by strong growth across business verticals. Going
forward we expect the company to report healthy growth on back of increase in industry
penetration. Further, the company’s profitability is also expected to increase due to its
focus on increasing the share of higher-margin businesses in the revenue mix.
On the valuation front, at the upper end of the price band, the pre-issue P/E
works out to 40.6x its FY2016 earnings which is lower compared to its peers
(Team Lease is trading at 63.1x FY2016 earnings) and also has a better margin
and ROE profile. Further, post the IPO, QCL is expected to improve its operating
margin significantly. Considering the above mentioned positives and the
company’s relatively lower valuation, we recommend a SUBSCRIBE on the issue.